Our Investment Commentary for Q4 2016 (1 October – 31 December 2016)

Our Investment Commentary for Q4 2016 (1 October – 31 December 2016)

Developed equity markets have performed strongly in Q4 and continuing sterling weakness against the dollar has inflated overseas returns for UK investors. Indeed, over the last year, sterling has lost nearly a quarter of its value against the yen, a fifth against the dollar and 15% against the euro.

The UK FTSE-100 delivered another strong quarterly performance outstripping the US in local currency terms boosted by a further 5% fall in sterling against the dollar. However, economic forecasts remain muted for the UK economy as the uncertainty of Brexit weighs on corporate investment and the potential spectre of low growth with stubborn inflation from a weak currency. The more domestically focused FTSE-250 reflected the uncertain outlook for the UK economy with a broadly flat performance in Q4 and a 12.5% underperformance against the FTSE-100 since the EU Referendum in June.

The surprise victory for Trump in the US Presidential election in November did not unsettle global equities as many commentators had expected. Indeed, the US market has enjoyed another robust quarter with the S&P 500 hitting an all-time high in December taking only the second interest rate rise since 2008 in its stride. Whilst many aspects of Trump’s rhetoric have attracted criticism, the markets have fixed on the potential for significant fiscal expansion and growth from spending on infrastructure, as well as the potential de-regulation of banks and energy. Earnings forecasts in most sectors look healthy, but valuations in some parts of the market appear stretched. There are two major risks for the US economy – will the Trump presidency deliver on the anticipated growth; and how quickly will the Federal Reserve raise interest rates, balancing domestic growth with inflation, whilst keeping a watch on the effect of a strong dollar on the wider global economy.

The Eurozone faces significant challenges, most notably Brexit, but also the ongoing risk of a weak banking system. In addition, as populism continues to sweep the western world undermining the established political order, the Italian prime minister resigned after losing a referendum on constitutional reform in December. Uncertainty is the key word as general elections loom in the Netherlands, France and Germany in 2017.

The outlook in China is somewhat mixed. Whilst the Chinese economy appeared to stabilise in 2016, concerns remain with industrial overcapacity and an overextended credit boom. High levels of debt are unsustainable and future Chinese financial stability depends on economic reform to resolve imbalances whilst maintaining growth.

Emerging markets came under intense pressure after the US election as a result of a strong dollar and fears of a protectionist president. Japan, on the other hand, raced ahead in the wake of Trump’s victory as the yen weakened more than 10% against the dollar, benefiting Japanese exporters.

In conclusion, markets face potential turbulence over the coming months from political uncertainty. Populism threatens the benefits of globalisation and free trade, and the danger of unresolved geo-political tensions in the Middle East loom large. On a positive note, we expect President Trump to change the terms of reference for economic discussions from austerity to growth in a bid to normalise interest rates nearly a decade after the global banking crisis. Market volatility highlights the benefit of our diversified investment approach. For patient long-term investors, such volatility should be welcomed – it creates opportunities and is the basis of the superior return which equity investors can expect over time.

The table below shows the performance of global markets on a total return basis (ie. dividends re-invested) in both sterling and local currency over the last quarter of 2016 and the calendar year of 2016:

Market

Index

Performance 2016 Q4 (% change) GBP

Performance

2016 (% change) GBP

Performance 2016 Q4 (% change) Local currency

Performance 2016 Local currency

UK

FTSE 100

4.32

19.07

4.32

19.07

USA

S&P 500

8.97

32.67

3.65

11.23

Europe, ex-UK

MSCI Europe Ex-UK

4.92

18.62

5.93

2.31

China

MSCI China

-2.31

20.35

-7.10

0.95

Japan

Nikkei 225

6.06

24.62

16.20

0.42

Emerging Markets

MSCI Emerging Markets

0.75

32.61

-1.44

9.68

World

MSCI World

7.08

28.24

4.78

9.00

UK Gilts

FTSE All-Stocks

-3.43

10.10

-3.43

10.10

Our Strategic Asset Allocation

Portfolio

Cash/Bonds %

Equities %

Alternatives (e.g. Property/ Infrastructure) %

Cautious

50-90

10-40

5-20

Income

25-65

25-65

5-20

Ethical

25-65

25-65

5-20

Balanced

25-65

25-65

5-20

Growth

5-25

60-90

5-20

Adventurous

0

88-100

0-10

Current Positioning

Cautious: Bonds/Cash: 50, Equities: 40, Alternatives: 10

Income: Bonds/Cash: 25, Equities: 65, Alternatives: 10

Ethical: Bonds/Cash: 34, Equities: 49, Alternatives: 17

Balanced: Bonds/Cash: 25, Equities: 65, Alternatives: 10

Growth: Bonds/Cash: 6, Equities: 89, Alternatives: 5

Adventurous: Bonds/Cash: 0, Equities: 95, Alternatives: 5

Our approach is to help our clients benefit from attractive equity returns and target sustainable dividends from a diversified portfolio, on the basis of our diligent research and analysis to highlight interesting investment opportunities and mitigate risk as far as possible.

[Matthew Clark, Seabrook Clark Ltd, 3 January 2017]

Please note, our Investment Commentary is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch.

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